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Assignment I on

Profit Maximization and


Sales Revenue Maximization
1. Tamakoshi Electronics Limited has following demand and cost functions:
P = 2000 – 10Q (demand function)
C = 1000 + 200Q (cost function)
a) Calculate the price (P), output (Q), total profit (p), and total revenue (R) of the firm
under the objectives of
i. Profit maximization
ii. Sales revenue maximization
iii. Sales–revenue maximization subject to a profit constraint of Rs.79,500.
b) Which, one of the objectives mentioned above, increases social welfare and why?
c) What would be the effect on price, quantity and profit of the firm under the objective
of profit maximization, if fixed cost increases to Rs. 12000?

2. Bhattarai has written a new managerial economics book for which he has received
royalty payments of 20% of total revenue from sales of the book. Because his royalty
income is tied to revenue, not profit, he wants the publisher to set the price (in Rs.) so that
total revenue is maximized. However, the publisher’s objective is maximum profit. If the
total revenue function is
TR=100,000Q–10Q2 and the total cost function is TC=10,000+20Q+Q2
Determine
a) The output rate the will maximize total royalty revenue and the amount of income that
Bhattarai would receive.
b) The output rate that would maximize profit to the publisher. Based on this rate of
output, what is the amount of royalty income that Bhattarai would receive?

3. Given the total revenue, demand function and total cost function:
TR = 20Q – Q2, P = 20 – Q and TC = 50 + 4Q
Determine the price (P), output (Q), and total profit (p) under the objective of the firm:
a) Profit maximization
b) Sales–revenue maximization and
c) Sales–revenue maximization with profit constraint of Rs. 13.

4. Given the following demand function and cost function


P = 100 – 2Q and TC = 10 + 0.5Q2
Find the price and total profit under the objectives of
a. Profit maximization
b. Sales–revenue maximization and
c. Sales–revenue maximization with a profit constraint of Rs.350
d. If fixed cost decreases by Rs.4, what would be the impact on price, quantity and profit of
the firm under profit maximizing objective?

5. Company X has the following demand and cost functions:


Q = 20- P and TC = 30+10Q + Q2
a. Determine the marginal revenue and marginal cost functions.
b. If the objective of the company is to maximize profit, what quantity should it sell and at
what price? What are its total sales- revenue, total cost and total profit?
c. If the objective of the firm is to maximize sales-revenue, what quantity should it sell and
at what price? What are its total sales- revenue, total cost and total profit/loss?
d. Suppose the Board of Directors of the company accepts the objective of sales-revenue
maximization but at the same time sets a minimum profit standard of Rs.40, find the
quantity, price, sales-revenue and total cost.
e. Suppose that the fixed cost increases from Rs.30 to Rs.40 in the total cost relationship,
will this affect the profit maximizing quantity or sales- revenue maximizing quantity
f. In your opinion, which one of the above three objectives maximizes social welfare and
why?
6. A company has the following demand and cost functions:
Demand function: P = 250- Q
Cost function: C = Q2 + Q + 100
Find the level of output and price under the objectives of
i. profit maximization.
ii. sales-revenue maximization.
7. A company has the following demand and cost functions:
P= 50 – Q and C = Q2 + 2Q + 200
Requirements:
a. Find the level of output and price under the objectives of
i. profit maximization
ii. sales- revenue maximization.
b. What would be the effects on price, output and profit under the objective of profit
maximization if fixed cost increased to $300?
c. Which one of the objectives mentioned above do you think maximizes social welfare and
why?
8. Firm XYZ has the following information on price and cost estimated by an econometrician:
P = 100 – 4Q and TC = 16 + 4Q + 8Q2
i. If the objective of the firm is to maximize profit, what quantity should it sell and at what
price? What is the total profit it earns?
ii. If the objective of the firm is to maximize revenue, what quantity should it sell and at what
price? What is the amount of profit or loss the firm has at this price?
iii. The management of the firm decides that the firm must earn Rs. 68 as the minimum profit
to keep the shareholders satisfied. What quantity should the firm produce despite its
objective to maximize sales-revenue? What price should it charge?
iv. Under which of these objectives the social welfare is maximum? Why?